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Retail investment outpaces office and industrial sectors

Retail has outpaced the office and industrial sectors to be the strongest growing industry for commercial property investments in 2017, according to CBRE.

The property firm’s latest marketview report found $9.4 billion worth of retail assets changed hands in 2017 – reflecting a 6 per cent spike on 2016 sales volumes. By comparsion, the office sector recorded a 3 per cent increase in transactions at $16 billion for the year, while the industrial market saw a 18 per cent drop in sales to $5.6 billion rom the year prior.

By sub-sector, regional shopping centres contributed to $2.2 billion of investment volumes, while large format retail saw more than $1.3 billion transact. CBD and sub-regional shopping centres experienced sharp falls in sales activity, with 41 per cent and 34 per cent declines in investment volumes.

While there was continued discussion around the threat of online retail, CBRE’s national director, retail investments, Mark Wizel said there continued to be a strong flow of capital into the market, with shopping centre transaction activity surging 113 per cent to $2.6 billion in the final quarter of 2017.

“Investors are hedging the risk of online sales versus the safety of long term leases and, at this stage, the long term leases providing strong cash flow are winning,” he said.

There are early indications on the retail front for 2018 suggested greater interest in high quality, metropolitan retail centres, particularly those in areas that offered potential for adaptive uses.

“This includes centres that are closer to transport hubs and the CBD, where new office or residential tenancies may prove more attractive than retail tenants,” said Wizel.

“There is also very strong demand for single tenant retail assets, anywhere from $10 million to $100 million, with Bunning’s still the pick of the bunch.”

CBRE senior research manager Danny Lee said increased levels of competition from international retailers and online businesses was underpinning greater innovation in shopping centres.

“Retail landlords are beginning to embrace short term leasing options or engage with third party leasing platforms in order to help fill space,” he said.

“Automotive retailers are also starting to open stores in shopping centres in order to increase brand awareness and offer consumers a different experience to traditional automotive retail outlets.

“Headwinds in the sector and the rise of online retailing will continue to produce winners and losers. It is imperative to continue to innovative, put in tenants with advantage over the internet and meeting customer expectations had has shifted because of technology.”

The research shows yields continued to compress in 2017, with large format assets experiencing the largest compression of 40 basis points, followed by regional shopping centres with 30 basis points and CBD assets at 15 basis points.

“We forecast yields are at their peak and likely to stay flat in 2018, with some expansion in 2019 dependent upon the global and domestic interest rate cycle,” Lee said.

All retail asset types experienced moderate rent growth in 2017, albeit still slower than in 2016. Sydney CBD prime rents experienced the largest growth (13 per cent), driven by demand spilling over from super prime rent and the low availability of quality space in the CBD.